Question

WRITE AN ESSAY

In Module 7, you submitted your spreadsheet. For this module, you will take what you submitted in your spreadsheet, and use that information to write your paper.

Directions:

Your paper must:

Be 4-6 pages in length.

Include a proper introduction and conclusion.

Include a reference page.

Provide your reader with an overall understanding of the financial health of your chosen firm including the following:

Discussion of the ratio analysis results, including rationale for the ratios chosen.

Discussion of all horizontal and vertical analysis from above.

Discussion of four items from the management discussion of the firm that support the conclusion formed in your discussion of the financial results.

Income Statement All numbers in thousands Horizontal Analysis Vertical Analysis 12/31/2013 % change % change from 2016 from 2015 inserted 12/31/2016 12/31/2015 12/31/2014 from 10k) 12/31/2016 12/31/2015 12/31/2014 to 2015 to 2014 Revenue Total Revenue Cost of Revenue Gross Profit Operating Expenses Research Development Selling General and Administrative Non Recurring Others Total Operating Expenses Operating Income or Loss 20% 135,987,000 107,006,00088,988,000 74,452,000 88,265,00071,651,00062,752,000 54,181,000 47,722,000 35,355,00026,236,000 20,271,000 100% 65% 100% 67% 33% 100% 71% 29% 27% 23% 35% 35% 0% 31% 0% 43,536,00033,122,000 26,058,000 19,526,000 32% 27% 4,186,000 2,233,000 178,000 745,000 87% 1154% Income from Continuing Operations Total Other Income/Expenses Net Earmings Before Interest and Taxes Interest Expense Income Before Tax ncome Tax Expense Minority Interest Net Income From Continuing Ops Non-recurring Events Discontinued Operations Extraordinary Items Effect Of Accounting Changes Other Items Net Income Net Income Preferred Stock And Other Adjustments Net Income Applicable To Common Shares 0% 192% 116% 0% 161% 1947% 119% -1513% 190,000 206,000 4,376,000 2,027,000 459,000 3,892,0001,568,000 950,000 79,000 99,000 210,000 111,000 167,000 98,000 647,000 141,000 506,000 161,000 3% 484,000 0% 148% 50% 1,425,000 2,371,000 596,000 241,000 274,000 298% 347% 0% 0% 096 2,371,000596,000-241,000 274,000 298% 347% 2.371.000596,000 241,000 274,000 298% 347%

Answer 1

(Please note that the data is extracted from 10k report of amazon, which was used as a basis for the preparation of anaylsis)

Introduction

This case study is for Amazon.com Inc., who does a online business of retail sale of the products. In addition to the selling products which are manufactured by amazon, they also provide a platform to other sellers to sell their products online and also provide support for fulfilment of orders processed on their own websites.

Amazon.com, Inc. was incorporated in 1994 in the state of Washington and reincorporated in 1996 in the state of Delaware. Our principal corporate offices are located in Seattle, Washington.

Amazon encompasses a large variety of product types, service offerings, and delivery channels.

Amazon's current and potential competitors include: (1) online, offline, and multichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products we offer and sell to consumers and businesses; (2) publishers, producers, and distributors of physical, digital, and interactive media of all types and all distribution channels; (3) web search engines, comparison shopping websites, social networks, web portals, and other online and app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration with other retailers; (4) companies that provide e-commerce services, including website development, advertising, fulfillment, customer service, and payment processing; (5) companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline; (6) companies that provide information technology services or products, including on-premises or cloud-based infrastructure and other services; and (7) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices.

Horizontal and Vertical analysis

The vertical analysis shows the increase / decrease in various heads of the financial statements compared to the previous years.

The horizontal analysis shows the percentage of expenses that contribute to the revenue and percentage of various heads in balance sheet that contribute to the total assets of the balance sheet.

In the statements above, it is evident that there is a drastic increase of revenue and expenses in year 2016 from 2015 as compared to the increase of revenue as compared from 2014 to 2015. It can also be noticed that there is corresponding increase in the expenditure along with the revenue. Anyhow, on observing the horizontal analysis, it is evident that the increase in expenditure is proportionate to the increase in the revenue and rather has reduced as compared to previous years i.e, the percentage of the expenses in 2015 to the revenue is 67% while it is only 65% in 2016. This depicts the costs savings.

The selling, general and administrative expenses has increased from 31% to 32% which should have contributed to decrease in the cost of revenue and thus increased the net income from 1% 2015 to 20% in 2016.

The equity is increased by 44% as compared from 2015 to 2016, which is equally distributed in almost the same proportion to the current assets, long term assets. The ratio of the assets and liabilities to the total assets is almost maintained by the company.

It can be noted that the retained earnings increased by 93% from 2015 to 2016 and also that the company has moved from a state of loss in 2014 to state of profit in 2015 and increase in profit by 298% in 2016 as compared to the profits in 2015.

This exhibits a health grown state of the company affairs and that it is financially strong and that its strategies are being successful.

Ratio analysis

Quick ratio:

Quick ratio shows that readily available cash resources to meet the current liabilities. An ideal quick ratio is from 1 to 1.5.

From analysis, it is evident that the company is having a quick ratio of around 0.75 in 2016 and 0.78 in 2015 and 0.82 in 2014. That means that if Amazon has to repay all its current liabilities immediately, it has $0.75 for each $1 of liability. It can also be observed that there is consitent decrease in the the quick ratio during all these years. This means that the company is relying on its inventory and other cash assets to pay its short term liabilities.

Debt to equity ratio:

Debt/Equity (D/E) Ratio is used to measure a company's financial leverage. The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders' equity.

Amazon is having a debt equity ratio of 3.3 in 2016, 3.8 in 2015 and 4 in 2014.

That means 1/4 th of the financing is from equity and 3/4 is from debt. That means Amazon is taking utmost possible financial leverage from debt and tax benefits there on

Working capital to total assets:

This is liquidity ratio. The Working capital to total assets is very low and this depits that there are serious cash flow difficulties for the company, with the company unable to make payments to its suppliers and creditors, even when it makes profit and has assets to cover its liabilities.

Altman's Z-score

Other ratios which are used in the Altman's z-score which is around 0.2 shows that company is in distress zone.

Overall understanding and financial health of Amazon

All the above ratios also show that the company is having issues with the liquid cash and management needs to take a decision to overcome this situation.

Management discussion

Below are the extracts from Management discussion:

Our Expansion Places a Significant Strain on our Management, Operational, Financial, and Other Resources

We are rapidly and significantly expanding our global operations, including increasing our product and service offerings and scaling our infrastructure to support our retail and services businesses. This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. We may not be able to manage growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results.

Our Expansion into New Products, Services, Technologies, and Geographic Regions Subjects Us to Additional Business, Legal, Financial, and Competitive Risks

We may have limited or no experience in our newer market segments, and our customers may not adopt our new offerings. These offerings may present new and difficult technology challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues. In addition, profitability, if any, in our newer activities may be lower than in our older activities, and we may not be successful enough in these newer activities to recoup our investments in them. If any of this were to occur, it could damage our reputation, limit our growth, and negatively affect our operating results.

Our financial focus is on long-term, sustainable growth in free cash flows1 per share. Free cash flows are driven primarily by increasing operating income and efficiently managing working capital2 and cash capital expenditures, including our decision to purchase or lease property and equipment. Increases in operating income primarily result from increases in sales of products and services and efficiently managing our operating costs, partially offset by investments we make in longer-term strategic initiatives. To increase sales of products and services, we focus on improving all aspects of the customer experience, including lowering prices, improving availability, offering faster delivery and performance times, increasing selection, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust.

Cash provided by operating activities was $11.9 billion, $6.8 billion, and $5.5 billion in 2015, 2014, and 2013. Our operating cash flows result primarily from cash received from our consumer, seller, developer, enterprise, and content creator customers, advertising agreements, and our co-branded credit card agreements, offset by cash payments we make for products and services, employee compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), payment processing and related transaction costs, operating leases, and interest payments on our long-term obligations. Cash received from our customers and other activities generally corresponds to our net sales. Because consumers primarily use credit cards to buy from us, our receivables from consumers settle quickly. The increase in operating cash flow in 2015, compared to the comparable prior year period, was primarily due to the increase in net income (loss), excluding non-cash charges to net income (loss) such as depreciation, amortization, and stock-based compensation, and changes in working capital. The increase in operating cash flow in 2014, compared to the comparable prior year period, was primarily due to the increase in non-cash charges to net income (loss), including depreciation, amortization, and stock-based compensation, partially offset by changes in working capital.

Conclusion

Amazon needs to work on its working capital and liquidity position to sustain the continuity and to avoid bankruptcy.